To Survive, Roku Will Jump Out of Its Box and Into Your TV

Share

To Survive, Roku Will Jump Out of Its Box and Into Your TV

Roku

The contest over the future of how you watch TV has some formidable contenders. Google, Apple, and Amazon are competing along with Comcast and Time Warner Cable over who controls the largest digital real estate in your living room. Perched in the middle of these massive cable and Internet behemoths is Roku—the little company that could. Or at least hoped it could.

Let’s be honest: it’s amazing Roku is still in business. The number of small startups that have tried to jump into the fray and capture a slice of the multi-billion-dollar cable industry is large, and mostly not memorable. (Clicker? Zinc? TiVo anyone?) By contrast, Roku has grown to 10 million active accounts, a jump of more than 50 percent in a year. “If you think of that as a traditional cable company, we would be in the top five by number of viewers in the United States,” says CEO Anthony Wood.

Let’s be honest: it’s amazing Roku is still in business.

Still, the odds are steep. That's why Wood says he has a plan to transform Roku from its signature tiny black set-top box into the software platform that powers the next generation of television—no matter what company is producing or distributing it.

Roku, as Internet history buffs will remember, was developed by Netflix as a video-streaming device for movies in 2007. Internally, it was called "Project Griffin." Shortly before launch, CEO Reed Hastings decided instead to spin Project Griffin into a separate company, preparing Netflix to be able to stream its software on competing devices over time. Wood, who was leading the internal project, became the company’s CEO.

The company gained traction in the market by doing one thing exceptionally well shortly after broadband became mainstream. Broadband which made it possible for us to watch Internet video that didn’t freeze, buffer, and otherwise suck; to take advantage of this new flow, Roku launched an inexpensive, dead-simple, puck-sized box that let us watch that video on our TVs. If you wanted to watch Netflix on TV, time was you needed a Roku box.

3,000 Channels and ...

But that was Internet TV 1.0. Netflix began to stream on many other devices, from smart TVs to game consoles to Google’s Chromecast. Other programmers, from Amazon to HBO, began offering TV and video over the web. Before long, Roku was competing with myriad devices to bring the Internet to your big screen.

Roku has sought to stay relevant by expanding beyond Netflix to host other apps, or channels, on its platform. Today, viewers can choose from nearly 3,000. (And you thought your 250-channel cable menu felt overwhelming ... .) Now it’s making a play to be the "Intel Inside" of next-gen TV, the software that your TV manufacturer or cable company—or both—will have to license to serve you up the programming you want.

'We are well along the path to transitioning from a company that makes money from hardware to a company that makes money from advertising and billing.'

Roku CEO Anthony Wood

So far, the strategy is working. The company started licensing software to TV makers in mid-2014, beginning with Chinese manufacturers HiSense and TCL. Sharp, Haier, and Best Buy’s house brand, Insignia, also license the software. Ultimately, Wood expects more people will get Roku as part of their TV than as a separate product within the next couple of years. By the end of 2015, he says, Roku had captured eight percent of the smart TV market.

"That was just in our first year," says Wood. "I believe every TV company except for Samsung will license [Internet-enabling] software and they’re going to license predominantly from Roku." The foil to Wood's optimism is that Roku's major competitor is Google’s Android software.

(Wood claims Roku is better because unlike Android, which was developed and optimized for more powerful phones, Roku is developed specifically for less powerful televisions. He says partners pay less for it, and it’s easier for them to use.)

Roku is also striking partnership with existing cable providers. In New York, for example, a customer can subscribe to a small number of channels delivered over the Internet by Time Warner and receive a Roku box as part of the deal. Overseas, Wood is striking similar deals. Last fall, for example, Roku reached an agreement with Australian broadband provider Telstra to offer a streaming media box it is calling Telstra TV. (In international markets, where the Roku brand is not as strong, consumers may not even know Roku is powering their Internet-enabled TV.)

Beyond the Box

But Wood says the company is seeing the fastest growth of all in its advertising business. Increasingly, Roku is selling ads that direct users to check out and follow other apps. For example, Showtime might use the ad service to show ads on Roku that direct users to install Showtime Anytime, its streaming service. Or it might signal viewers that a new show is launching and encourage them to press a button that adds the show to their Roku feed, a feature that lets you bookmark shows and get notified when they’re available for streaming. If a viewer signs up for a new subscription service through Roku, the company takes a cut. "We are well along the path to transitioning from a company that makes money from hardware to a company that makes money from advertising and billing," says Wood.

Related Stories

Even so, this moment in the evolution of television—let’s call it Internet TV 2.0—will shortly give way to the next. Right now Roku may have most comprehensive menu and the simplest design available to TV viewers, but many companies are vying to one-up it. Sure, currently, even the best cable menus are laughably bad, and Internet video can be hard to find on our TVs. But all that will surely change. For one, the FCC is taking steps to inject competition into the cable set-top boxes. While that decision is still a long way off, Google is striking deals with TV manufacturers to license its license its Chromecast technology directly, adding another entrant to the market for licensed software.

For now, what may give Roku an advantage for at least a while longer is its small size and independence. The large companies are reluctant to strike the deals necessary to provide for a more integrated experience to viewers because they don’t want to give up any ground to competitors. You can’t buy an Apple TV on Amazon, for example; if you search for it, the first result will be Amazon’s digital media player, Fire TV. You can’t watch an NFL game on your Apple TV. And you can’t pull up a Netflix film from your Comcast menu. Roku comes closer than any other company to working with everyone. “We are not threatening,” says Wood. “We are little Roku.”

BTIG media and tech analyst Richard Greenfield agrees. “They aren’t competitive with each other in any way,” he says. “But can they be Switzerland and integrate everyone? That’s the question and it’s TBD.” It will continue to work, at least, as long as the competition over the TV guide of the future persists between the old guard and the new.